RESP Withdrawal Rules and Strategies For 2015

by Mike Holman

When the RESP beneficiary (student) is ready to go to school, the subscriber (owner of RESP account) needs to start withdrawing money from the RESP account. To withdraw money you have to provide some proof to your resp provider that the resp beneficiary (child) is going to an approved post-secondary school. You don’t have to show receipts for specific purchases.

Two types of money in the RESP account

In your RESP account, there are two different types of money: contributions and accumulated income.

The contribution amount is the sum of all the contributions that you made to the account over the years.

The accumulated income is made up of grants, capital gains, interest, dividends earned in the account.Any money that is not a contribution is considered to be accumulated income.

This distinction is important because the taxation of withdrawals from the contribution portion of the account is different than withdrawals from the accumulated income portion.

Contribution withdrawals are not taxed.

EAP (educational assistance payments) which are withdrawals of accumulated income, are taxed as income at the hands of the student.

The good news is that students have the personal exemption, as well as tuition tax credits which helps lower their tax bill. Obviously income earned during summer jobs or on co-op work terms will affect their taxes as well.Another bit of good news is that you can tell your financial institution if you are with drawing contributions or EAP (or both) so you can manage the taxes to some degree.

Please note there is no withholding tax on any kinds of RESP withdrawals, so if the student ends up in a taxable situation, they will have to pay the taxes at tax filing time.

A withdrawal limitation

First – one withdrawal rule to get out of the way – you are only allowed to withdraw $5,000 of accumulated income in the first 13 weeks. After 13 weeks, you can withdraw as much accumulated income (via EAP) as you wish. There are no limits to withdrawals from the contribution portion as long as the child is attending school.

Basic RESP withdrawal strategy

When planning the withdrawals, try to withdraw as much accumulated income money as you can tax free.For example when the student first starts school, they will have just completed a short summer (two months) so they probably won’t have much income for the year. That might be a good time to maximize payments from the accumulated income portion of the account (EAP).

On the other hand, if the student is in a co-op program and has two work terms in one year and only one school term, that might be a good year to take out contributions rather than accumulated income.

You don’t want to end up with accumulated income in the RESP account if the child is no longer going to school.

What if your child doesn’t go to school?

What happens if Junior decides that school is not for him? You have to collapse the plan and pay a pile of tax on it.

First of all you have lots of time to collapse the plan so don’t do it right away. It’s always possible that your child will give up on their pro hockey or musician career and will need the money for schooling later on. You can keep the account open for 35 years after the year in which the account was opened.
If you do collapse the plan, the contributions are tax free, anything else (accumulated income) is added to the subscriber’s gross income for taxation purposes.And on top of that, the accumulated income is charged a tax of 20%.
If you are retired or have any way to reduce your income in the year you collapse a resp plan, do it to save taxes.

What if the child does more than one session at school (ie multiple degrees)?

You are allowed to use the RESP for one degree and then keep some money in the account for future education. The only limit is the 35 year limit previously mentioned. Be warned that it’s not a bad idea to take out all the RESP money during the first degree so that there are minimal taxes and no penalties. If you save money in the RESP account for future degrees and the child doesn’t end up using the money, there will be increased taxes and penalties.

Mike – you’re the first person to whom I turn when a question involves RESPs.

I was reading a KPMG Tax Planning book and it mentioned the $5,000 withdrawal limit during the first 13 weeks of attendance. That concerned me because Scotia iTrade made yet another one if it’s oh so many blunders.

It sent my wife two cheques for her daughter’s use – a $5,000 cheque followed by a $1,000 cheque. It listed the first as being sourced from EAP and the second and smaller cheque as coming from Capital.

Are we still onside? Will this total a $5,000 addition to her daughter’s income? Or will it be $6,000?

2) If only one subscriber parent is named, can the subscriber withdraw money for their own use at any time? Or can funds only be withdrawn with proof of enrollment or when kids hit a minimum age (such as 18).

3) In cases that the kids don’t use the funds for a post-secondary education or training, does the subscriber get the proceeds on collapse even if a separation/divorce agreement states that the liquidation shall be split evenly among both parents?

Answer To Spring:
The formulas for how much money to take out from RESP, without affecting OSAP are rather complicated . I have found a document, unfortunately I can not send a link to it. Search on Google for “2007-2008 OSAP Manual” and it will be a pdf file . Unfortunately the government seems to hide the 2011-2012 edition. In a nutshell if your incomes are low, the EAP given to the child does not affect the OSAP till around $2500 a year assuming the child has no other income or grants. Please be informed (make your own inquiries for this) that the principal part of RESP that you withdraw is added to your income for the child’s OSAP application purposes (line 850 of the application, see the footnote 33) (I called the ministry and that is what they told me).
However there is another rule if the parents income is large enough for contributing to the child’s education. In this case the RESP EAP given to the child is compared with the calculated parent’s contribution to the child’s education, according to the OSAP rules. If the RESP EAP is lower, it is not taken into consideration for OSAP calculation. Unfortunately the rule is explained in burocratic english, and there are no examples in the manual to let you understand it..I found no references to this rule on the Ministry website.
WARNING: please be aware that the OSAP aid estimator on the ministry website does not do a proper calculation for RESP withdrawals…Also it does not tell you the traps for income calculation, like how your RRSP contributions or TFSA withdrawals will reduce your child’s OSAP or even the non repayable grants!

I have a family RESP for my 3 children.
I have withdrawn enough income so that one child has reached the $7,200 grant withdrawal limit (my investments did OK).
Since the plan still contains both grant money and non-grant income, can I still take out money for this child without having to return grant money to the government.
What I have read so far indicates that some calculation takes place to break up the income withdrawal into grant and non-grant amounts. For this child, the additional grant money would put him over the $7,2000 limit and would be clawed back by the government.
I am with RBC, can I specify that only non-grant income should be withdrawn ?

I have a question related to withdrawal of Principal from RESP. I have a family plan and my oldest child is going to U of X in September, so she will qualify for EAP. That allows me to withdraw my principal with no penalty.
It seems that I do not want to make an EAP RESP withdrawal for him, because he would loose about 40% of it in OSAP grants. Can I still withdraw my principal even though I did not make an EAP payment as long as she qualifies, or I do have to make an EAP payment first (maybe $1 :-)?

I was wondering what I need to to in regards to the 50% of the tuition I gave to my ex for my sons education. My ex paid the college in full for the year for my son and I paid her half of that. I got the money transfered out of an resp account then gave her a personal cheque for the 50%. I am now doing my taxes and it is asking me if I contributed to education. I stated “yes” and stated the amount. it then asked me for whom and if they are working. I stated yes to this because my son is working part time while attending school. it hten asked me his net and gross income. When my ex found out that i needed this information off of my sons T4 my son was told that he did not have to give that to me and put in my sons head that I am trying to benefit from his tax credits as a student. That is not what I am trying to do but just doing what the tax forms are asking of me. My son now has it in his head that I have no right asking for this. What do I do leave it blank or write a note to the gov”t attached to my taxes stating the situation. Can my ex benefit from my son going to school and stating they paid for the whole year of education? What should I so

I withdrew resps to pay for my son and daughter’s tuition. I just did their taxes and forgot to include the eap portions in their taxes. However, the mostly mutual funds that were in these investments mostly lost money. Should I resubmit?

My son is a full time student and received a T4A for, I assume, AIP of his RESP. He is still my dependant and I claim his tuition (T2202A) on my tax return. Do I also have to include his T4A income on my tax return or can I file a tax return for him just for the T4A?

Hi there, you have some really great information. There is one thing I am wondering about. A potential FP advised me to withdraw my child’s RESP as cash (from a different FP) because it was in a high risk mutual fund and has dropped several thousand dollars in just over a year…he said that the government would not claw back any of it’s grants, etc because the fund had lost. Is this true? My child needs this money next year…

Hi Mike,
All very good info – thank you. Can’t seem to find the answer to this question though: we have a family plan for our 2 sons – allocated 50/50. Are the contributions tracked per beneficiary and hence limited upon withdrawal to what we put in for each of them, or can we decide how much of the contribution portion will go to which son? (One son has dropped out of high-school, the other is aiming for university. Can we use the contributions we put in for son # 1 as eventual payments for son # 2? I understand that the grant portion for son # 1 will be taken back by the government but what happens to the contribution portion?)
Thanks,
Anita

I have a family plan for my 2 sons. I contributed around 60k total. This year my oldest son is going to a university. I plan to withdraw EAP 5k for the first 13 weeks and another 2.2k later. I want to take 50k out from my capital, will the government take away the grant because I took out too much capital?

I have a family plan for my three children. The oldest is 18 and has just started university. I can fairly easily calculate the amounts of grant money that each child has received from my records, but there is also some interest and some dividends making it harder to calculate.

I believe the oldest childs grants total about $5500. Other income so far or in the future, may or may not reach $7200. Can I or should I still withdraw $7200 as EAP?

I understand that the distinction between contributions and non-contributions is important. Unfortunately, some of the investments have not performed well, so the original contribution amounts have decreased somewhat. If total value minus grants and income is less than contributions, how do you know what is taxable and what is not?

Hi,
I have a daughter attending a highschool in Alberta, we reside in BC. She went away to boost up her classes and get the courses she needs to get into a good university. Can I withdraw RESPs now to help her through her last year, away from home, at highschool to prepare for university?
She is 17 and will be 18 in May 2013

I was wondering….. If a student has an RESP set up and the student will be graduating at the age of 17, the student will be going to university full time in Sep 2013, should the student be using their RESP funds first before applying for student loans?

Is there any age restriction that can be applied so the student can not use it until the age of 21, even thought he/she will be attending university full time starting the age of 17?

If so, how does this afftect the student from getting a student loan, knowing he/she has this fund available to them? Please advise. Thanks!

In my opinion, the RESP should be completely depleted before using student loans. I don’t know why anyone would want to borrow money if they have cash in their RESP account.

There is no minimum age for using RESP funds for full time study.

I’m not too clear on the various student loan guidelines – it’s my impression that RESP withdrawals will affect loan eligibility, but not sure about the presence of RESP funds. This varies by province so you will have to check with your provincial student loan office.

I am filing my taxes for 2012, however I noticed that my statement for my RESP accounts for 2 semesters and my post secondary institution only accounts for 1 semester. This has offset my return and my income appears much higher than it suppose to be and I now owe the government. Do you have any suggestions how I can fix this?

I have a question about withdrawals from RESP and hope someone can help provide an answer.

We came to Canada in 2011 and opened the account. I have been keeping the CCTB and UCTB payments in there. We currently have a balance of around 19k. But we got some letter from the CRA that we should pay back some of the UCTB and CCTB (around $7k). Now the only way I can pay back is taking it from the RESP where it was saved, but I understand there will be huge penalties.

Can anyone explain this please. Kids are still small and not even started school yet. I just want to withdraw to pay government back.

My son is starting this September the first year of engineering co-op program at McMaster. The total of his first year payment to school will be around $20,000. We have around $41,000 in the RESP account and we are planning to withdraw all of the $20,000 from the RESP account. As it is a co-op program and he will be working at some point but not the first year, how much contribution amount and how much accumulated income we should take from the $41,000 in order not to have to pay taxes afterwards? Thanks

@ Jean123 and Mike’s response
First one point of clarification – I assume Jean123 knows this, but some of the wording in the question is a little confusing. There are three “pots” of money in an RESP – contribution, CESG (and related provincial grants), and earnings. There is no difference beween earning/interest/income on your own contribution and on the CESG.

If the first child has already withdrawn $7,200 in CESG it is still possible for her to have a further EAP payment made. Jean123 is correct that there is a formula for pro-rating an EAP between grant and income…however, if you will review the formula you will find that the way it works out is that if the beneficiary has already received the maximum $7,200 CESG then the entire EAP simply comes from the income/interest/earnings (obviously up to the total available in the plan in income/interest/earnings).

I have had to argue this repeatedly with RESP plan sponsors on behalf of my clients – they just are not used to this situation and often their internal procedures are incorrectly set up to handle this situation.

Hi Mike, My Daughter has been working and has $1739 RRSP contribution room and she will continue to work throughout university. I wonder if we can use $1739 from her RESP, open an RRSP for her (saving the tax credit for when she needs it after graduating). Then could I cash the RRSP using the Lifelong Learning Plan (LLP). Does this make financial sense and how does the 90 day LLP rule apply to this. It is confusing me! Thanks, Judy

Hello, found your blog very helpful, easy to understand, much easier than the CRA website! I have 3 kids and I am making payments every year of 2500 to maximize the grant. The funds are invested in a family plan and I control the investments. When it comes time to start the withdraw the funds our children will likely be attending university in the same city. I am thinking we could really save on room and board if the kids lived together. So my question, could my wife and I finance a 3 bedroom condo close to the university, then make payments out to our children, that they would then use to pay the mortgage payments? This will lower the overall living expenses allowing more funds for the tuition , and at the end of their studies we would be left with a fully or partially paid for condo. If payments can be used to cover room and board at university residences or for paying rent, why not for mortgage payments. Or could we purchase a condo and have the children pay rent back to us? Thank you for your reply.

Hi, your blog is very helpful. I have a son who will be starting college in the U.S. this fall. We have contributed good amount, but not enough to pay for his four year tuition – the tuition there is much higher over there. We have applied for financial aid and scholarship. Will withdrawals from RESP considered to be my son’s income in the U.S? Do you have any advice for us?
Thank you.

Hello, we recently withdrew a total of $7500 last year for our oldest son’s first year at College. We didn’t realize there were 2 ways to withdraw the money and it defaulted to the EAP. (our financial guy didn’t talk to us about options) We assumed our son wouldn’t have to pay taxes on the full amount. Our son made a fair bit of money working part time last year and we would have considered a different withdrawl method and timing. His income last year including the RESP withdraw totals $20,000 and he will now have to pay taxes. In addition he can only claim 1 semester’s tuition (Sept -Dec) and the $7500 technically was for both semesters (was paid in June and Nov of last year , the last payment to cover Jan-April semester.) Can we go back and undo how our RESP payment was withdrawn? We would have preferred to withdraw our contributions. If not, do you have any suggestions for us?
also, did we go over the $7200 grant limit? It’s a family RESP for our 3 boys.

Hi, Mike. I have a family plan for 3 children. My oldest son will be 18 next year. I did not know and was not inform by Alberta Treasury Branches about the catch up contribution which could have allocated more to my oldest child for previous years, but instead, my contributed amount was allocated equally at $2500 per year per child. As of this year, all my 3 children each has accumulated 3500. Does the grant money paid to each of my child can only be withdrawn by that child? Thank you!